Long-term PPAs to Save Utilities from Big Shock

HIKE IN NATURAL GAS PRICES: GROWTH TRIGGER FOR SOME, WHILE OTHERS FACE A HIT 

The revision in gas prices, which comes into force from April 2014, will have a marginal impact on power utilities such as NTPC, Reliance Power, GMR and GVK Power, thanks to the long-term power purchase agreement (PPA) with distribution companies. After the new gas price, the power bill of state discoms is likely to rise by just 3.5%, which in absolute numbers works out to $1.2 billion (. 7,000 crore). This may well be absorbed but given their poor financial health, distribution companies may need an additional subsidy from the government. 
Power producers, which sell power on longterm contracts, are likely to see a marginal impact on their earnings as in most contracts the fuel cost is a pass-through. What the government will need to ensure is that the state electricity boards are able to purchase power at higher costs. For most of them, gas-based plants form only 10-15% of their total power producing portfolios. But as power becomes more expensive, these companies may have to reckon with lower volumes though there is a comfort in that discoms will have to ensure at least a RoE of at least 15.5%.
Among gas-based power producers, stateowned NTPC will be the least less impacted as it has the entire capacity tied for longterm contracts with a fuel cost passthrough. However, GMR Infra and GVK Power, which plan to sell 20-25% power in the open market, will see a slightly higher impact. For these companies, gas-based capacities are higher than that of NTPC. NTPC’s gas-based capacity is only 12% of its total portfolio, while for GMR Infra and GVK Power it is over 25%. Reliance Power also has a 2,400 MW gas-based plant, which
    is still not operational. 
Another key consumer of domestic natural gas is the urea industry. The governmentmandated market price of urea is way below the cost of production, thus making it necessary to provide subsidies to producers, too.
For the industry, the feedstock cost is a pass-through. So, the rise in domestic gas prices will have no impact on the operating profit of fertiliser players. However, the industry’s working capital position could be stretched as the government typically delays subsidy payments, which leads to higher interest costs. Credit rating agency Crisil estimates that a rise in interest cost will lead to a 30-40 bps decline in net profit margins of urea manufacturers, assuming other things remaining constant. The government has already indicated that it will continue to subsidise these industries. If that happens, it will benefit all gas-based plants which are operating below 20% due to the fall in domestic availability of gas.